Prices of raw materials overcook

The prices of wheat, corn, barley, cotton, soybeans, sugar and cocoa have been sprouting like the proverbial beanstalk over the past year, a situation market specialists describe as unprecedented. And although the volatility of these commodities was similar worldwide, Romanians pay much more for their daily bread than other Europeans. Why?

Simona Bazavan, Dana Verdes

Unprecedented – this is how specialists characterize the prices of raw materials over the past year. Our daily bread has become more and more expensive as wheat prices have risen two and a half or even three fold over the past seven months, Aurel Popescu, president of the Romanian Employers’ League of the Milling, Bakery and Flour Based Products Industry (Rompan), told Business Review. “It is unprecedented. I have been following the statistics over the past 40 years but I haven’t seen such a sudden and strong surge. These prices are historical,” he said.

While in July 2010 the price of wheat was about EUR 120-130/ton, it closed the year at EUR 300/ton, then reached EUR 340 in February, before falling back to about EUR 300/ton more recently. The variations are highly atypical, specialists say.

Much of the increase fed through to the final price of bread. Even so, the bakery industry has been working at loss since last October, Popescu added. Cutting costs and increasing prices were a must.

As expected the evolution of wheat prices, low purchasing power and the growth of the black market – by about 60 percent according to Popescu – left their mark on the local bread industry. Out of Rompan’s 230 member companies, more than 25 either went bankrupt or chose to halt their activity until the first local wheat crops were harvested, reported the association president.

Wheat prices this year depend on the quantity and quality of the local crop and international trends.

Give us this day our daily bread – and charge us more than across the EU

Despite the unfavorable international context, Romanians have to pay even more for bread than shoppers in other European countries.

This is due to the unfortunate combination of both internal factors and the wheat price hikes on international stock exchanges, Popescu said. Last year only 70 percent of domestic demand for wheat was covered by local crops while Romania exported about 2.4 million tons for an average price of EUR 150-170 per ton. As stocks are presently running low, local mills and bakeries are being forced to import wheat for no less than EUR 300-320 per ton.

“The reason for this discrepancy is that Romania exports poor quality wheat used mainly as fodder and imports much of the necessary bread wheat,” Popescu added. Subsidizing local farmers and encouraging them to cultivate waste land, investing in technologies and the necessary crop treatments, and the overall better management on behalf of the authorities could well change the situation on the short and medium run.

Commodity markets operate on a global scale and have to be looked at in an international context, Martin Schuldt, Cargill GM, told BR.

“Prices are rising due to many factors. These include increasing global consumption due to population growth and rising prosperity, increasing demand for protein, and the growth of bio-fuels. Along with this, a poor harvest in Russia, Canada and the Ukraine in 2010, a recent heat wave in Argentina and floods in Australia all contributed to lower agricultural yields,” said Schuldt.

Government decisions also influence price rises. Some countries have chosen to impose bans or restrictions on agricultural exports or to stockpile staple grain.

This aggravates volatility by removing raw materials from markets when a maximum amount of tradable commodities are needed.

Killer cereal prices

Higher prices for wheat and cereals in general are a challenge for meat producers and processors. Grigore Horoi, president of Agricola Bacau, told Business Review that more expensive raw material, including fodder, means that local meat producers have to find ways to cut costs even more, something that they have been doing since 2008 when the crisis started.

He noted that last year the shelf price of poultry went down by 13 percent (excluding VAT). So far this year it has increased by 11 percent (excluding VAT), but this doesn’t mean that things are looking good for poultry companies.

“Getting over the sudden plunge in purchasing power last year, which was mainly caused by austerity measures, doesn’t help the business take off,” he said. Horoi added that so far the acquisition price of cereals has increased by 120 percent on average since 2009, and by 40 percent against last year. Overall, the cost of all the necessary resources in the production cost, including fuels, has increased this year to 27 percent, compared to 12 percent in the past two years.

Horoi thinks that there are only two solutions for the current situation – increasing the shelf price of poultry in line with the international trend and the authorities’ involvement in tempering prices.

Sew tough: cotton price rises pressure textile firms

Cotton also saw price increases last year, putting local textile companies in difficulty. The price of cotton threads doubled in 2010, Maria Grapini, member of the board of directors of the Textile, Confections and Leather Manufacturers’ Association (FEPAIUS), told Business Review.

This left local manufacturers with few options. “Companies could not transfer this entirely into price hikes because we already have a real problem with the black market, with counterfeit products being imported at dumping prices,” Grapini said.

A similar view was expressed by Orlando Szasz, Renania GM. “On such a scale, the losses could not be offset in full. Rising commodity prices were reflected in the finished products. We decided not to transfer the entire cost of these increases to the customers so to support them we reduced operating margins,” Szasz told Business Review.

World cotton prices increased by 105 percent last year compared to 2009 and by another 33 percent from December 2010 to February this year.

The evolution of polyester was similar, with rises of 45 percent last year, plus a new climb of 16 percent for early 2011. And latex prices have hiked by 66 percent last year and 6 percent in the first two and a half months of this year. For cotton and latex these developments mainly came in the second half of the year.

And prospects for this year are still gloomy.

The price of cotton has already risen 10 percent, and specialists predict hikes in the prices of latex, PVC and leather, said Szasz. “We only hope that the growth level won’t be the same,’ Grapini added, pointing out that the price increases for raw materials along with higher prices for utilities and fuels will mean lower profits for companies and far less money to

invest.

“All this reduces the competitiveness of local manufacturers, especially on the domestic market, and manufacturers already have to deal with tough unfair competition,” Grapini said.

Specialists blame speculators for the soaring prices. The Renania GM told BR that investors have turned their attention to agricultural products in recent years, as funds allocated to them for stock speculation in this area have increased from 1 percent to 5 percent of total investments.

PET price sees cost of water bubble up

And it doesn’t stop here. Elsewhere in the FMCG segment, bottling companies are seeing costs surge following the price increase of oil, not only in the form of fuels.

The price of polyethylene terephthalate (PET) was EUR 1,200 per ton at the beginning of 2010, and closed the year at EUR 1,500 only to hike further to the EUR 2,000 mark now.

The price of polyethylene granules, which are used to make labels for plastic bottles, plastic bottle caps and other plastic packaging, has also skyrocketed to about EUR 2,100 per ton after starting 2010 at only EUR 980, Radu Lazaroiu, general director of Romaqua Group, the company which bottles the Borsec mineral water, told Business Review.

The oil price hike, the closing of several European production companies and speculation are mainly responsible for the situation, in his view.

“For the past four years, the Chinese have been buying large quantities of polyethylene granules, they stock it and later sell it in April or May for the price they choose,” said the Romaqua Group director.

But while the cost of oil is the main factor, prices seem to move only in one way.

“What is interesting is that the price of a ton of polyethylene granules is more expensive now that an oil barrel costs USD 120 than when it reached USD 140,” he went on.

While so far Romaqua Group representatives say that through cost optimizing they have managed to avoid passing the rising prices onto their customers, they think they will have to add 5 percent to the price of Borsec mineral water from next month.

Things aren’t expected to recover easily as today agriculture around the world is in a virtually constant state of flux.

“Small changes in the quantity of production have very dramatic impacts on price. Supply-and-demand issues and external events are both injecting high levels of uncertainty into already nervous global markets,” Schuldt told Business Review.

simona.bazavan@business-review.ro

dana.verdes@business-review.ro

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